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Individual Insolvency & Bankruptcy in England – an English Eccentricity

di - 5 Novembre 2013
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At the beginning of the eighteenth century, with the introduction of the Act of 1705[8], the notion of bankruptcy as a legal condition capable of being brought to an end (now called “discharge”), was introduced. This was a clear softening of the law towards a debtor, although a fraudulent trader who became bankrupt could still be sentenced to death[9]. In earlier times, a bankrupt remained so for life and was always tainted with the stigma associated with that. However, even at the end of the eighteenth century, the perception that bankrupts were quasi-criminals was still maintained, with bankrupts still called “offenders” (a legal term normally associated with criminals).
The nineteenth century (when Great Britain grew to be a global commercial power, with sophisticated legal and commercial concepts of credit) witnessed significant developments in the law of individual insolvency. Parliaments of that century passed over fifty statutes concerned with insolvency, reflecting rapid development of commercial, social and economic change. As remarked upon by twentieth century jurists: “This concern followed a pattern which had been going on for many generations. Each new wave of legislation had usually been precipitated by some economic crisis or grave business scandal (such as the South Sea Bubble in the early part of the Eighteenth Century, and the railway company and banking failures in the Nineteenth Century) or by a desire to mitigate some of the harsher features of the law[10].
The development of individual insolvency law in this period is better understood in the light of similar, parallel, developments in company law and the development of the concept of limited liability companies. The nineteenth century was a period of dramatic change for England and Wales. Armed with the powerful economic weaponry of the industrial revolution[11] but wounded by the economic upheavals of the Napoleonic wars (as well as other corporate disasters) the English progressed through the early part of the century with a mixture of economic optimism and realism, and a real sense of the fragility of gaining and retaining wealth.
In 1813, the Court of Relief of Insolvent Debtors was established. Life was improving for bankrupts, although not by much: while they could still be imprisoned for being bankrupt[12], at least they could be released from prison after fourteen days, provided their assets did not exceed £20 and their creditors did not object.
The first attempts to reform English bankruptcy law began, therefore, shortly after the end of the Napoleonic wars. The Act of 1825[13] allowed, very significantly, a person to make himself bankrupt, with the consent of his creditors. Before 1831, the power to administer the insolvent’s estate was left to the creditors, with inevitable abuse (such as creditors selling property to each other, selling at an undervalue, and so on). After 1831, officers known as Official Assignees, attached to the London bankruptcy courts, were appointed to administer the estates. Still often corrupt and imperfect (and eventually abolished in 1869), that embryonic system nevertheless demonstrated the recognition that justice needs to be meted out both to the debtor and the creditor by the imposition of a neutral, accountable, administrator. It was an important step and its vestiges remain today in purer form. Reforms continued as the nineteenth century wore on. As public concern grew over how a bankrupt’s estate was administered, (both on the creditors’ and the debtor’s behalf,) Parliament passed the Bankruptcy Act 1883 to address those concerns. As Joseph Chamberlain[14], who was President of the Board of Trade, told Parliament when the prospective law was being considered:
“Every good bankruptcy law must have in view two main, and at the same time, distinct objects. First, the honest administration of bankrupt estates, with a view to the fair and speedy distribution of the assets among the creditors whose property they were; secondly, following the idea that prevention was better than cure, to do something to improve the general tone of commercial morality, to promote honest trading, and to lessen the number of failures. In other words, Parliament had to endeavour, as far as possible, to protect the salvage and also to diminish the number of wrecks”[15].
The main thrust of this legislation was to improve the quality of the administration of the bankrupt’s estate by placing it into the hands of independents who could act fairly both towards the creditors and the debtor. Public and transparent examination of the estate was encouraged, as well as fair, accountable and clear distribution of funds to creditors. Significantly, Parliament also recognised (as a matter of public policy) the need to “diminish the number of wrecks” and saw making legislation as way to prevent bankruptcy if possible, as well as make it fairer when it was not. This statute is the basis of modern insolvency law as we know it today.
Before we leave this quick review of the nineteenth century, it is suggested that developments in bankruptcy law at that time can be better understood in the bright light of parallel developments in English company law, and particularly the limitation of personal liability of those individuals who own such companies.
Originally, English corporations were only able to be created by Royal Charter. The Joint Stock Companies Act 1844 (the precursor to the later Companies Acts) dispensed with that. The important notion that a company was a distinct, legal entity was introduced. Moreover, owners of a company were personally liable for the company’s debts. Specific statutory provisions were introduced to deal with corporate insolvency with the Joint Stock Companies Winding Up Act 1844. The Limited Liability Act 1855 limited the liability of the shareholders of a company and protected them from angry creditors and possible bankruptcy.
By the end of the nineteenth century, the notion of corporations being separate legal persons, distinct from their shareholders, reached its high-water mark. In the leading case of Salomon v Salomon & Co [1897] AC22, the House of Lords, interpreting the Companies Act 1862, held that a company was a distinct legal person, separate from its shareholders, even if it only had one main shareholder. As such, it could own property and it could owe money. The debts of a company thus belong to the company, not to the shareholders.

Note

8.  “An Act to prevent frauds frequently committed by bankrupts” 4 and 5 Anne, c.17

9.  Smithfield in the City of London was a place of execution.

10.  The Cork Report para.27 (see below).

11.  See Fletcher supra footnote 2

12.  Imprisonment for debt (let alone bankruptcy) was abolished in England in 1869, although a debtor who could pay but wouldn’t pay may still be imprisoned for up to six weeks, thereafter. A famous imprisoned debtor was the father of Charles Dickens, whose humiliating imprisonment for debt inspired his son to write bitterly on the subject in Pickwick Papers and elsewhere.

13.  An Act to amend the law relating to bankrupts. 6 Geo. 4,c.16.

14.  Later to become Prime Minister.

15.  Hansard 19 March 1883, col 817, and quoted in the Cork Report at para. 49 (see below).

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